Buy China Stocks in Second Half, CLSA’s Wood Says

The Shanghai Composite Index dropped 136.69, or 5.1 percent, to close at 2,559.93, the lowest since May 4, 2009. Photographer: Kevin Lee/Bloomberg

May 18 (Bloomberg) -- Investors should avoid buying China’s
stocks until the third quarter when the government starts
unwinding measures to curb asset bubbles, said Christopher Wood,
chief equity strategist at CLSA Asia Pacific Markets.

China’s stocks plunged the most since August yesterday on
concern government steps to cool the property market and
European austerity measures will hurt economic growth. The
Shanghai Composite Index dropped 136.69, or 5.1 percent, to
close at 2,559.93, the lowest since May 4, 2009. The measure
rebounded 1.4 percent today.

“I don’t think we’re near the end of the monetary
tightening cycle,” Wood, the second-ranked Asia strategist in
Institutional Investor magazine’s annual poll, said in an
interview yesterday at the CLSA forum in Shanghai. “The
government only started taking more aggressive measures in April.
Buy stocks in the third quarter.”

China last month imposed a ban on loans for third-home
purchases and raised mortgage rates and down payment
requirements. The central bank ordered lenders this month to set
aside more deposits as reserves for a third time in 2010.

Even with the tightening measures, property prices jumped a
record 12.8 percent in April from a year earlier and consumer
prices rose 2.8 percent, the fastest pace in 18 months.

Premier Wen Jiabao said the government will “decisively”
contain excessive increases in housing prices in some cities and
curb growth of industries with overcapacity, the official Xinhua
News Agency reported May 15. China should keep the strength of
macroeconomic controls “reasonable” and boost policy
coordination, Xinhua said, citing Wen.

Property Outlook

Chinese stocks will only “bottom” when it becomes clear
the government’s tightening is coming to an end, said Wood, who
is based in Hong Kong. Property companies would be better
investments than banks once policy eases as they have been
“beaten down more,” he said today. “So far, there is no
evidence of any easing.”

CLSA said it expects the central bank to raise interest
rates in the second half of the year. The nation’s property
prices will fall this year, hurting the outlook for other
industries such as commodities, Wood said.

The Shanghai stock index has lost 22 percent in 2010, the
world’s fourth-worst performer among the 93 gauges tracked by
Bloomberg, after surging 80 percent last year. The measure
entered a bear market on May 11 after falling 21 percent from
its Nov. 23 high.

“Investors are worried that more property tightening is on
the way even as Europe throws up more uncertainties about the
global economy,” said Michelle Qi, a Shanghai-based portfolio
manager at Bank of Communications Schroders Fund Management Co.,
which oversees about $6.5 billion.

China Banks

China’s stocks rebounded today after Morgan Stanley said
the European debt crisis may spur the government to put further
tightening measures on hold.

The brokerage upgraded the nation’s banks to “equal-weight” from “underweight,” adding Bank of China Ltd., Bank
of Communications Co. and China Construction Bank Corp. to its
portfolio, while “taking profit” in selective shares in the
consumer, capital goods, auto and media industries, according to
a note to clients.

European finance ministers return to Brussels yesterday a
week after agreeing to a $1 trillion financial lifeline for the
euro region. Ministers are under pressure to show they can
reduce deficits fast enough to satisfy investors and then police
budgets effectively once targets are met.

“If the European financial crisis blows up, I would agree
that China’s policy would ease quicker,” Wood said today.

The euro will be on par with the U.S. dollar “sooner or
later” as the region’s debt crisis worsens, said Wood.

He recommended buying emerging-market equities and shares
of multinationals that sell to developing nations because of
their faster economic growth prospects.